Microsoft to Delay Next Version of Windows

Microsoft's long effort to deliver the next version of its Windows operating system suffered another setback yesterday when the company said that the system would not be ready for consumer personal computers for the holiday sales season.

The Microsoft announcement, made after the close of the stock market, came as a surprise. For more than a year, the company had said it would deliver the new operating system, Windows Vista, sometime in the second half of 2006.

Yesterday, Microsoft said Vista would be ready for large business customers, who typically buy the company's software in multiyear licenses, in November. But the consumer rollout will be pushed back to January 2007.

The slippage, analysts said, is likely to have little lasting impact on Microsoft or PC sales. But it points to the trouble the company has had designing and debugging the new operating system, brimming with features, complexity and an estimated 50 million lines of code.

The analysts said the delay would be a disappointment for electronics store chains, like Circuit City and Best Buy, and for PC makers. "This hits retailers and it hits PC makers that were looking toward Vista for a surge in consumer PC sales at the end of the year," said Tim Bajarin, principal analyst at Creative Strategies, a technology consultant.

The Windows delay follows Microsoft's difficulties in meeting its production goals for its Xbox 360 video game console after its release last November. Yesterday, however, Microsoft said it was accelerating output of the devices, potentially helping it capitalize on the postponement of Sony's rival PlayStation 3. Microsoft attributed the further delay in Windows Vista as a matter of a few weeks to ensure quality and security testing.

Over the last year, Microsoft executives have emphasized the importance of reducing the vulnerability of their products to computer viruses and other malicious code. If the security focus means product development takes longer, they have said, so be it.

"We won't compromise on product quality, and we needed just a few more weeks," James Allchin, co-president of Microsoft's Windows division, said in a conference call with analysts and journalists.

In an interview after the conference call, Mr. Allchin said that he made the decision to take a few more weeks yesterday mornning after a meeting with the leaders of the Windows development team. No single feature or problem prompted his move, he said.

"But I wanted to push up the quality even higher," Mr. Allchin said. "And the balance between usability and security is a tricky one."

The security testing process, for example, has included dozens of outside computer security consulting companies -- known as blue-hat hackers -- who are given access to the Windows Vista code and its documentation and asked to try to find any ways to break in. Mr. Allchin characterized that program alone as the "largest penetration-testing effort ever conducted on a commercial software product."

The shipment delay, he conceded, was "a bit painful, but we're trying to take a leadership role here and do the right thing."

The new version of Windows has encountered repeated delays. The last major release of Microsoft's operating system, Windows XP, was in 2001. The gap of more than five years is a long one for Microsoft, which has generally shipped a new version of Windows every three or four years.

In August 2004, Microsoft said that it would release Vista sometime in 2006, and that it was scaling back its technical ambitions for the product by removing an intelligent data-storage system, called WinFS.

Mr. Allchin stressed that the current delay had no effect on the set of features now planned for Vista -- features that Microsoft has shown off at customer conferences in the last week.

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Microsoft's shares fell more than 3 percent in after-hours trading following the announcement, easing to $26.82 a share, down from the close of $27.74 in regular trading.

Analysts did not expect the Vista delay to hurt Microsoft's financial performance in the 2007 fiscal year, which will end in June 2007. Mostly, they said, revenue anticipated in one quarter will move into a later quarter.

Some analysts were surprised that a few weeks' delay could be predicted so early in the year. And Charles Di Bona, an analyst at Sanford C. Bernstein & Company, said sales of Microsoft's Xbox video game consoles might benefit during the holiday season from not having to compete with new Vista-based PC's for consumers' dollars.

"You won't have new PC's crowding out the Xbox, and that could work to Microsoft's advantage in a holiday season when it looks as if there won't be competition from Sony PlayStation 3, because of Sony's shipment delays," Mr. Di Bona said.

Sony disclosed last week that the PlayStation 3, originally due this spring in Japan, would not be available until November, giving Microsoft a full year's head start.

Microsoft said yesterday that starting this week it was increasing by two or three times the number of Xbox 360 consoles sent to retailers each week, a figure it did not specify.

"Today we have turned a major corner," Peter Moore, corporate vice president of Microsoft's interactive entertainment business, said in a statement yesterday, adding that by June the company expected 80 games to be ready for the machine.

When it introduced the console last November, Microsoft said it expected to ship three million Xbox 360's in the first three months, and 4.5 million to 5.5 million by the end of June. But it encountered component shortages and was forced to lower its projection for the first three months to 2.5 million to 2.75 million. It has not said whether it met that target.

But even with Microsoft's acceleration in production, analysts said, frustration over the Xbox 360 shortage may have led some game enthusiasts to decide to wait the extra months for the PlayStation 3.

"The question is, How many of those who didn't buy a 360 in December will now wait for the Sony?" said Michael Pachter, a game industry analyst with Wedbush Morgan Securities. "Some will."

For Microsoft, the Xbox 360 is a critical part of the strategy of converging home electronics and entertainment, eventually integrating computing, music and gaming through a home media system in consumers' living rooms.

Some analysts say they believe that as part of that strategy, Microsoft is in the early stages of developing a hand-held device that will combine the features of a music player like the Apple iPod with a gaming machine that would compete with Sony's PlayStation Portable.

The San Jose Mercury News reported Monday that Microsoft was designing such a product; Microsoft officials declined to comment.